Carillion collapses into Liquidation

Much has been made of various Carillion group companies having entered compulsory liquidation (also known as Winding Up by the Court) in the early hours of the morning of Monday 15th January 2018.

The Official Receiver (part of the government agency, The Insolvency Service) has automatically taken up the office of Liquidator by virtue of the court order. One suspects the petition for compulsory winding up (made by the directors of the company) may make interesting reading.

In a simultaneous application for the companies to be placed into compulsory liquidation, an application was made (and granted) for the appointment of Special Managers.

The Special Managers are all licenced insolvency practitioners in the case of the six Carillion companies and are all with the accounting firm, PWC.

What is a Special Manager?

If a liquidator does not have the relevant, but necessary, skills they may make an application to court pursuant to section 177 of the Insolvency Act 1986, as amended, to appoint a person or persons as a Special Manager. The Special Manager will then have the necessary skills to perform whatever tasks are required for the purposes of the liquidation.

A Special Manager can trade a company on a day-to-day basis or plug a specific skills gap of the Liquidator.

Who can be a Special Manager?

Anyone who has the relevant skills, qualification or experience can be appointed a Special Manager – even a director of the company in liquidation.

Who can apply to court to appoint a Special Manager?

It is a full application made to court by the Liquidator or a Provisional Liquidator.

What has to be shown?

The application has to be accompanied by a report to court stating the reasons why Special Managers are required. A Special Manager, if appointed, is an Officer of the Court.

The Liquidator or Provisional Liquidator also has to estimate the value of the business or property that the Special Manager will be appointed over.

The Special Managers will also have to give security equivalent to the estimated value of the business or property over which they are appointed.

The powers, duties and obligations of the Special Manager will be laid out in the Court Order that appoints them. Their prime duty is fiduciary in nature and they remain as an officer of the court. They will be reporting to the Liquidator regularly and providing accounts every three months.

How much will a Special Manager be paid?

The court will fix the remuneration basis and quantum of the Special Manager from time to time. It will be in the application, but is based upon the value of the business or property for which they are responsible. They will be entitled to be paid as an expense of the liquidation.

How does the appointment of the Special Manager get Terminated?

In the case where a company is already in liquidation, if the Liquidator holds the opinion that the Special Manager is no longer necessary or beneficial for the company. They make an application to court for the termination and the court may grant the appointment be terminated.

If the creditors of the company in liquidation decide (via a decision procedure) that a Special Manager is no longer necessary or beneficial for the company, then the Liquidator MUST make the same application to court.

What does this mean for Carillion?

At present (as at 16.30 hours on 15/01/2018), the Special Managers are advising that trade is currently continuing:

Employees are to go to work as normal. They will be paid as an expense of the liquidation.

Customers must pay outstanding balances under usual trading terms and that services are continuing as usual (for now)

Suppliers are to continue providing goods and services under usual contract terms, and payment will be made for those supplied from the date of the Official Receiver’s appointment as Liquidator onwards

Landlords premises are being occupied for the time being until such time as the Special Manager / Liquidator determines the property requirements. Daily rent will accrue from the date of liquidation and be paid as an expense of the liquidation until the resource requirements have been determined. Rent arrears as at 15/01/2018 will be a claim in the liquidation estate(s)

Defined Benefit Pension schemes will move to the Pension Protection Fund (a government agency), so the existing c27,000 members will liaise with them in future.

In very simplistic terms, the winding up order creates a line in the sand:

It is estimated that the Special Managers will be working alongside the senior management, secured lenders, suppliers and customers until buyers for the various aspects of the business are found. Indeed, the Special Managers own website is inviting interested parties to get in touch. There’s even a web form to capture data quickly.

Why Liquidation?

Liquidation is a terminal process for a company. There is usually one exit route – the company’s ultimate dissolution. So why, when it has been widely reported in the press, when the re-negotiation of credit terms with key financiers began to show signs of failing and that administration was looming on the horizon, did the administration process not get used?

It is a question that has been puzzling some in the insolvency profession. But as with every project, the deeper you dig, the more you find.

Administration Objectives

An administrator has to be able to achieve one of the following three statutory objectives:

rescuing the company as a going concern

achieving a better result for the company’s creditors as a whole than would be likely if the company were wound up without first being in administration

realising property in order to make a distribution to one or more secured or preferential creditors

It is purely conjecture, but it may transpire that when you look behind the scenes, behind the dressing on the windows, no one could honestly say that one of those above objectives could be achieved.

Secured lenders have the power to appoint Administrators in order to protect their lending, however, there has to be something of value or worth to sell.

Detailed analysis of contracts may find that there is nothing positive left to be achieved within the contractual terms

Penalty clauses within contracts can easily become prohibitive

Warranties and guarantees may prove costly to honour

Pension scheme legacy issues lead to significant funding questions

Unions desperate to protect their members’ interests.

Benefits of Compulsory Liquidation

Compulsory Liquidation has some distinct advantages:

Employee contracts are terminated automatically

Transfers of Shares are void

Dispositions of property are void

Executions or sequestrations are void

No legal action can be taken against the company without the court’s permission

All current legal actions are stayed

All floating charges are crystallised

Director’s powers cease.

Chasing Turnover

The age-old adage of “Cash is King” once again holds true.

Rumours of Carillion taking longer and longer to pay its suppliers have been flying around as early as 2013. Recent press articles have implied that contracts were being pursued for turnover only, without in-depth analysis of the true margins associated with each contract. The narrow margins were then squeezed further onto sub-contractors who in turn pushed the costs down the supply line to the many-a-level of sub-sub-…-sub-contractor.

It won’t be just the main sub-contractors affected by Carillion’s collapse, but the very many levels of sub-contractors and suppliers. Some suppliers may not even know that they have ultimately supplied their goods to a Carillion project. It will only be when they are not paid that the true impact will be felt.

It is almost guaranteed that the contracts that the Carillion companies have found themselves to be bound by are going to be highly complex. It is unlikely (but not impossible) that such contracts will survive liquidation proceedings and the termination and penalty clauses are likely to make eyes water. But Liquidation proceedings do provide for an exit from the contracts. It must also be noted that it is likely that previous warranties may not be capable of being honoured.

Once the profitable contracts have been identified, and sold, what will remain? Once the level of creditors is finally known, and the full extent of losses to suppliers identified, only then will the position become clear. It is widely anticipated that Carillion’s ripples are going to be felt far and wide and for a long time.

There is one thing that can be said with any degree of certainty – there is far more to the Carillion story than is published right now. As time unfolds the pages will fill up with the stories from the front lines, probably fully explaining what currently feels like very unusual decisions having being made.

Are you impacted by Carillion liquidation?

It is widely anticipated that Carillion’s ripples are going to be felt far and wide and for a long time.

It won’t be just the main sub-contractors, but the very many levels of sub-contractors and suppliers. Some suppliers may not even know that they have ultimately supplied their goods to a Carillion project. It will only be when they are not paid that the true impact will be felt.

Any organisation that is currently owed monies by one of the companies in liquidation needs to start planning NOW. Produce a cash flow forecast and make the very big assumption that those monies will not be re-paid at all. Look at a detailed quarter (i.e. a 13-week period) on a weekly basis and see where your funding requirements are going to fall.

If your cash flow is starting to indicate that your business is going to be facing a finance issue, then early advice is key to business survival. Defensive measures taken now and taken quickly can often result in long term survival of the business. But you need to plan what is going to happen with:

Reduced cash flow

Reduced turnover

Loss of a [key?] customer

If you are a customer of a Carillion project, who may have just lost a building warranty (for example), then you need to consider how any remedial works are going to be paid for and research what the ultimate future consequences are if you then try to sell the building. Long term planning needs to be considered now.

If you need assistance in producing a detailed cash flow forecast, please contact Mitchell Charlesworth. We have a pool of talented individuals that can help you with your cash flows, assist with sourcing of short and long term finance and provide advice as to your own organisation’s solvency (or otherwise). The insolvency practitioners of Mitchell Charlesworth are available for advice and guidance on how to navigate these tricky waters. Please contact a member of the team below.